The Road to Ruin: How Grand Theft Auto Hit the Skids

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The Road to Ruin: How Grand Theft Auto Hit the Skids

Rockstar Gameography View Slideshow Editor's note: On April 29, game publisher Take-Two Interactive will release Grand Theft Auto IV, the latest entry in a series that has sold 70 million copies. It's the most popular and critically acclaimed M-Rated (not for kids under 17) game franchise in history, and the new game is expected to earn a half billion dollars. The game has also been a lightning rod for controversy, and Take-Two has been under investigation for financial improprieties.

We're republishing a story that first appeared in the May 2007 issue of Wired* about the trouble that GTA-developer Rockstar Games and publisher Take-Two faced at the time. Since the story appeared, five of the six Take Two board members have been ousted, including chief executive Paul Eibeler, and the company is fighting off a takeover bid from Electronic Arts. A class action suit was settled over the unintentional inclusion of "scenes of a sexual nature" in the previous Grand Theft Auto San Andreas, the all-time best-selling game in the United States.*

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“There are repercussions for the choices you make,” said Sam Houser, cofounder and president of Rockstar Games. It was October 2002, and I had been granted a rare interview with the gang behind the blockbuster Grand Theft Auto game franchise: Sam, his younger brother Dan, and their childhood friend Terry Donovan. We were sitting in Rockstar's stylish New York City office as Sam explained that concerns about the violence in his games were unfounded because GTA had a moral system hard-coded into it. Certain actions — like hit-and-runs and drive-bys — will increase the player's “wanted” level. “If you go around offing people, you’ll see the police,” he said.

Grand Theft Auto and its progeny — nearly a dozen sequels and spinoffs, including this fall’s GTA IV — let players live out their fantasies. But few videogame fantasies match the real-life adventures of Rockstar Games. Almost a decade ago, a gang of young prep-school-educated Brits invaded New York with a then-outrageous dream: to make video-games hip. They would elevate a medium built on Mario and Pokémon into something defiantly grown-up — games that would earn a place on shelves between Scarface and Licensed to Ill.

The lads at Rockstar Games scored. With more than 50 million units sold, Grand Theft Auto titles have pulled in a billion dollars in revenue. Along the way, the execs achieved the street cred and bad-boy rep of real rock stars. But then, like Tony Montana face-down in a pile of blow, they hit the skids.

The trouble began five years ago, when Rockstar’s embattled parent company, Take-Two Interactive, came under investigation by the Securities and Exchange Commission. Since then, there have been charges of shady accounting and backdated stock options. Last October, Ryan Brant, cofounder and onetime CEO of Take-Two, resigned. Four months later, he pleaded guilty to falsifying business records and agreed to pay more than $7 million in penalties, bringing his lifetime Take-Two hit to almost $11 million. He’ll be sentenced in August, and his departure was emblematic of a company that has seen three CEOs and two CFOs leave since 2001.

For all the financial irregularities and management shuffles, though, a few lines of code written into one of Rockstar’s games would cause even bigger headaches. Last June, Take-Two announced it had received a grand jury subpoena from Manhattan district attorney Robert Morgenthau seeking, among other things, documents “relating to the knowledge of the Company’s officers and directors regarding the creation, inclusion and programming of hidden scenes (commonly referred to as ‘Hot Coffee’).” Hot Coffee is an explicit sex minigame buried in the source code of Rockstar’s 2004 title Grand Theft Auto: San Andreas. Numerous lawsuits have also been filed over the scene.

The irony is thick: The company that defined virtual criminality is now associated with the real thing. Rockstar and Take-Two executives declined to answer questions for this article, but their rich and troubled story is revealed by official documents and former employees. It seems the blokes forgot that in life, as in Grand Theft Auto, there are repercussions for the choices you make.

INTRO LEVELDan and Sam Houser had dreamed of rock stardom since they were school kids in London. Their dad, Wally, was co-owner of a jazz nightclub, and in the early ’80s the brothers developed an obsession with the hip hop scene across the pond in New York. They would race home after a day of cutting up at St. Paul’s School to throw on records, sneak smokes, and dream.

Sam and Dan, now 35 and 33, idolized not only the rappers and the DJs but also producer Rick Rubin of Def Jam Recordings. A scruffy white college geek turned impresario, he had somehow insinuated himself into hip hop culture, working with the biggest acts, injecting his own sound, and making millions on his own terms. “People like that inspire me so massively,” Sam Houser told me back in 2002. His 18th birthday present was a trip to New York, where he bought a pair of Air Jordans and a leather jacket.

The Housers weren’t the only wannabe rock stars at St. Paul’s. The father of their pal and classmate Terry Donovan directed the iconic video for the Robert Palmer song “Simply Irresistible,” and Terry DJ’d at techno clubs.

Looking to break into the music industry, the youths all took jobs at BMG Music in London. Sam and Dan worked on lame in-house concert videos. Donovan was a self-described “A&R chap” who signed fledgling bands to sublabels. When BMG launched an interactive division in 1993, the three friends jumped at the chance to work there, even though the Housers’ previous exposure to game design was fiddling around on a Sinclair ZX Spectrum, and the extent of Donovan’s coding experience was getting his computer to write TERRY IS COOL.

The videogame industry works like the record industry: Labels put out CDs created by bands, and publishers put out software created by developers. Titles that do well pay for the flops. BMG Interactive released several games in the mid-1990s, but its big break came when it received a pitch from a developer in Scotland for a game called Race and Chase. The graphics were primitive, with an overhead point of view that looked like you were pushing toy Hot Wheels cars through a maze. But the game’s urban environment teemed with mobsters and thugs, and gameplay centered around boosting cars, rubbing out enemies, and rising through the underworld. For the young Brits weaned on Run DMC and The Warriors, it was a revelation. “Here was a game that was commenting on the world,” Dan said to me that day nearly five years ago. Race and Chase was signed and renamed Grand Theft Auto.

The gameplay was surprisingly unconstrained. The only limitation was your “wanted” level: Cause enough mayhem and a cop’s face would appear on a meter at the top of the screen. Police cars would give chase if they spotted you. Commit more egregious crimes and your wanted level increased. Now an in-game APB was put out on you. At wanted level three, police would begin to set up roadblocks. If you got busted, you got carted off to jail and your weapons were confiscated. But that was the extent of the limits. “The problem with other games is that when you hit a point that’s frustrating, you can’t get past it,” Sam Houser told me. “In Grand Theft Auto, when you hit a point that’s tough, just go do something else. That’s fucking great!”

In 1998, BMG’s games division was bought by Take-Two Interactive, a scrappy publisher in New York. It seemed like a good match. Take-Two had been launched in 1993 by a 21-year-old named Ryan Brant. Like Donovan and the Housers, he was born into a media family. His father, Peter Brant, owned magazines like Interview and Art in America, cofounded the Greenwich Polo Club … and had spent time in jail for tax evasion. Take-Two’s games, such as Ripper and Hell: A Cyberpunk Thriller, had adult subject matter, cinematic pretensions, and a deliberate, if ham-handed, edginess. But they were poorly received.

That’s where Donovan and the Housers came in. The Londoners had attitude, style, and what Dan Houser later called a “culturally relevant, detail-obsessed approach” to game-making. They moved their core team to New York and assumed the name Rockstar Games. (The group of coders and designers in Scotland was eventually acquired by Take-Two and renamed Rockstar North.) The name hinted at their ambitions. “We admired record labels, obviously, and clothing companies, which were obsessed with details and with an integrity between design, product, and marketing,” Dan told the Design Museum of London in 2003. Rockstar wouldn’t just sell games — it would sell a lifestyle.

WANTED LEVEL: ONERockstar Games started out in a cramped ground-floor apartment in New York’s SoHo district nicknamed the Commune. When the new execs weren’t working on their next game, they were soaking up American culture. “We were staggered by what was on television,” Donovan told me in 2002. To promote Grand Theft Auto 2 in 1999, they hosted a series of parties called Rockstar Loft. Just gaining entry was a game: To get directions, club-goers had to call a number and leave their contact info. They’d get called back and have to answer questions like “What has been the best moment in your life so far?”

GTA 2, which still had the Hot Wheels top-down viewpoint of the original, sold as well as its predecessor: about 2 million copies. A respectable figure, but it left the upstarts chastened. “We realized how hard being a game publisher is. We’ve actually got very serious, proper jobs here,” Sam told me.

He micromanaged production of GTA III, coaxing the team in Scotland to create something of unprecedented ambition. The game threw players face-first into a gory 3-D gang world. Released in October 2001, it sold five times as well as its predecessors.

What made GTA III so popular was the range of options it offered players. Steal a car and you could explore the sprawling metropolis of Liberty City. You could drive to the hideouts of one of the many crime lords and get a lucrative assignment. You could jump off ramps like Bo and Luke in The Dukes of Hazzard. Or boost a taxicab and pick up fares. Or climb into a fire truck or ambulance and be a vigilante do-gooder, dousing flames and saving lives.

Or, as the media was quick to report, you could pick up a prostitute in order to boost your health meter, then kill her to get your money back. It was just one possible course of action in a game that presented players with literally millions of options, but in the eyes of the general public it came to epitomize Rockstar’s blockbuster.

Like the Rolling Stones, Twisted Sister, and Marilyn Manson before it, GTA III was blamed for the supposed corruption of a generation. Following the game’s release, US representative Joe Baca, a Democrat from Southern California, introduced the Protect Children from Video Game Sex and Violence Act of 2002, asking, “Do you really want your kids assuming the role of a mass murderer or a carjacker while you are away at work?” Australia banned the game, and several lawsuits were filed, including a 2003 suit claiming the game inspired two Tennessee teenagers to shoot passersby, killing one and wounding another. That case sought $246 million in damages.

Not that such developments ever seemed to roil the Rockstars. “PlayStation players aren’t all 10 years old,” Donovan told me. “There isn’t some kind of social responsibility to have a redeeming value. Your responsibility is to provide a toolkit with which young adults can entertain themselves.” The legislation never passed, the lawsuit failed, and — of course — the controversy helped boost sales.

WANTED LEVEL: TWOTake-Two Interactive had a hit franchise, and its stock went from $7 a share in October 2001, three weeks before the launch of GTA III, to almost $20 the following January. But then came those nasty repercussions.

That month, the Nasdaq halted trading of the company’s stock for three weeks after Take-Two announced it would be restating earnings reports. The SEC also launched an investigation into its financials. It seemed that while the punks at Rockstar were off creating an invaluable piece of gaming IP, the bosses at Take-Two had quietly been playing a little game of their own called “parking transactions.”

The SEC alleged that on Halloween day 2000, executives at Take-Two recorded a single shipment of 230,000 videogames for $5.4 million, its biggest sale to date. But the games were soon sent back to HQ. To hide their return, Take-Two disguised it as a purchase of “assorted products.” According to the SEC, the company improperly recognized $60 million in revenue from 180 different parking transactions in 2000 and 2001. In June 2005, the SEC revealed its findings in a settlement agreement under which Take-Two paid $7.5 million in penalties — but admitted no wrongdoing.

It didn’t end there, though. Brant was charged by the SEC with awarding himself 2.1 million shares of backdated option grants between 1997 and 2003 — a period during which the stock price fluctuated by about $30 — and several other Take-Two executives received an undisclosed number of backdated shares.

As all this played out at Take-Two, the Rockstars continued their rise. Dan Houser assumed the creative reins, writing game dialog and directing star-studded voice-over sessions. Sam Houser, president and executive producer, played the charismatic visionary. He hung a poster in his office of Don Simpson, the infamous playboy producer of films like Flashdance and Top Gun.

To create their next game, the Housers jetted members of their development team to Miami on a fact-finding mission. Grand Theft Auto: Vice City would be a fun-house-mirror version of Florida circa 1986, drawing on TV’s Miami Vice, the film Scarface, and other ’80s iconography. The secret to a Rockstar game is the style, mood, and setting — what the Housers call its “vibe.” When Vice City was released in October 2003, its white-sand beaches, period hairstyles, and vintage clothing were impeccable. Seven CDs’ worth of music from the era blared from car radios and nightclubs, everything from REO Speedwagon to Rick James. Voice-overs featured talent like Dennis Hopper as a seedy porn film director, Burt Reynolds as a corrupt land baron, and Philip Michael Thomas as the treacherous sidekick of the protagonist, voiced by Ray Liotta. Porn star Jenna Jameson recorded dialog for the aptly named character Candy Suxxx.

In the fiscal year following the game’s release, Take-Two’s revenue topped $1 billion. At the same time, the Rockstar brand itself was becoming cool. Rockstar promoted GTA games by plastering stickers all over the city, as if it were a band. Donovan, who ran the marketing arm of the company, helped burnish its outlaw image. While most game companies mail journalists promotional T-shirts, Rockstar’s PR schwag became the stuff of legend: A barbed-wire garrote was sent out to reviewers of Manhunt, a game about a homicidal reality TV show.

By 2004, it had become a badge of hipness to wear a T-shirt with the company’s logo or to blast its soundtrack albums in your car. Grand Theft Auto was parodied on Chappelle’s Show and name-checked on a hip hop track by rapper Cam’ron. Rockstar Games had achieved the cultural cachet that Def Jam had in the 1980s, and the prep-school boys had become real-life rock stars.

WANTED LEVEL: THREERockstar Games moved to an even bigger loft down Broadway. The company gobbled up more game development houses to complement its satellite studios in Vienna, San Diego, and Vancouver. Many execs bought fancy cars and homes. But as one former employee puts it, “The money turned them into jackasses very quickly.”

The Housers became increasingly demanding. Gillian Telling, a former assistant to Dan, remembers being commanded to clean snow out of his home satellite dish. When she failed to bring in the right kind of bagel, she says he called her a “useless whore” and a “cunt.” Former employees say they routinely heard yelled insults and slammed telephones. “These people are insanely smart and really good at being mean,” says one. “They’re British.”

But, others argue, the tirades were part of the Housers’ overarching obsession with quality. “That’s the only reason the games are so good,” says former Rockstar producer Marc Fernandez. “It was the most exhilarating, impassioned place — they were totally committed to perfection. Imagine a company where 100 people felt like they were in the Beatles.”

The release of Grand Theft Auto: San Andreas on October 26, 2004, sent the Rockstar ego trip into overdrive. In just two months, it sold 5 million copies at 50 bucks a pop. San Andreas is set on the West Coast in the early ’90s. The action takes place in a Boyz n the Hood-style LA, an ersatz Bay Area complete with Haight-Ashbury hippies, and a glitzy Las Vegas. Fans and critics called it the company’s masterpiece.

To deflect charges that its games encouraged players to mistreat women, Rockstar created a new challenge for San Andreas: dating. To impress women in the game, players have to learn their tastes. Get your avatar a hairstyle and wardrobe she likes, pump iron at one of the in-game gyms, and she might let you take her out. Buy her flowers, drive her to a restaurant and a club, and maybe at the end of the night she’ll invite you in for some “coffee.” As she and your avatar disappear into her house, your health meter rises, and you hear their moans through the door.

As the success of San Andreas climaxed, so did the obsession with image control at the Rockstar loft. A former employee describes nights when top executives would sit at their computers, anxiously waiting for the reviews of their newest games to be posted online. An even slightly negative write-up would ignite “a shitstorm of … yelling and screaming.” The editor of one major videogame magazine describes the relationship with Rockstar as “a constant fight” because the company would jockey for sympathetic reviewers.

With GTA fever riding high, the antics of some of its top brass were overlooked by the gaming press and the public. But it would take just one scalding cup of joe to send the Rockstars plummeting back to earth.

WANTED LEVEL: FOUR“Don’t answer your phones! This is going to get ugly.” It was June 9, 2005, almost eight months after the release of GTA: San Andreas and, according to a former member of Rockstar’s PR team, Terry Donovan was ordering them to lay low. The day had started horribly and gotten worse. In the morning, the company put out a press release breaking the news of Take-Two’s $7.5 million penalty as a result of the SEC investigation into parking transactions.

But that wasn’t their only problem. Across the Atlantic, a gamer in the Netherlands named Patrick Wildenborg blogged on his site that he had unlocked a hidden scene in the PC version of San Andreas. “Rockstar build [sic] all this stuff in the game,” Wildenborg wrote, “but decided to disable it in their final release.”

He released a mod on GTAgarage.com that changed the climactic sequence of the dating missions, showing what happens behind the closed door after your character gets invited into his girlfriend’s house. And you don’t just watch — it’s interactive. Hit the Shift key to switch sex positions; tap the up and down keys to thrust your avatar’s pelvis. High scores are awarded for getting the girl off.

In a mainstream videogame, characters are allowed to bludgeon, blast, amputate, eviscerate, and decapitate, but they can’t have sex. A voluntary industry group called the Entertainment Software Ratings Board evaluates and rates games according to content. GTA games were rated M (mature), the equivalent of an R rating for a film. If San Andreas contained explicit sexual content, that would kick its rating up to AO (adults only) — a death sentence, since most retailers refuse to stock AO titles.

Rockstar unleashed crisis expert Rodney Walker to do spin control. Walker told me a few days after the furor erupted that the people responsible for the sex scene were “not within the company.” About a month after the discovery, a Rockstar press release characterized Hot Coffee as “the work of a determined group of hackers who have gone to significant trouble to alter scenes in the official version of the game.”

But Wildenborg insisted that hackers hadn’t created the content — he merely found it. “The script code, the models, the animations, and the dialog by the original voice actors were all created by Rockstar,” he wrote on his site. The gamer press soon confirmed that this wasn’t the work of the PC modding community, posting instructions on how to access the scene with the aid of a cheat disc and a series of codes in the original PlayStation 2 version of the game.

One ex-Rockstar employee claimed that Hot Coffee had always been in the game. “I knew it existed in April” — a full two months before Wildenborg’s mod — the alum said. “They released that bullshit quote about how this is the act of hackers, which is completely comical,” the ex-employee added.

Maybe the Hot Coffee sequence was created by an employee in his downtime as a gag and mistakenly left in the final product. Maybe it was made by a disgruntled coder intent on sabotage. Or maybe it was deliberate, a logical culmination of Rockstar’s efforts to push the limits of what games could do and be, but was then disabled for reasons unknown: tastefulness, propriety, or the simple fact that it wasn’t much fun.

One thing is certain: The scene wasn’t supposed to be found. Companies often leave unused programming in their games. It’s costly and time-consuming to comb through millions of lines of code to root out every unwanted element (and then verify that the deletions don’t break something else). Usually it’s cheaper to simply hide it so that it’s inaccessible to players, in the belief that no one will have the time and energy to hunt for it. But if GTA players have anything, it’s time and energy. Under the hood of San Andreas, Wildenborg discovered the various elements of the scene and tweaked a few lines of code to reassemble them.

On July 20, Rockstar confirmed the game was now AO-rated. It made a patch available for the PC version and recalled all copies from store shelves — at a cost of $25 million, according to the Federal Trade Commission. Then it rereleased the game with the offending material excised. Even though an elaborate series of hacks had been required to access it, Hot Coffee touched off a firestorm that made Rockstar’s previous scandals seem tame.

WANTED LEVEL: FIVE“The disturbing material in Grand Theft Auto and other games like it is stealing the innocence of our children.” So declared US senator Hillary Clinton soon after the discovery of Hot Coffee. The city of Los Angeles filed suit over the fact that Take-Two released an M-rated game containing AO-rated material. “Greed and deception are part of the Grand Theft Auto: San Andreas story — and in that respect, its publishers are not much different from the characters in their story,” said Los Angeles city attorney Rocky Delgadillo. Numerous additional civil suits were launched. In New York, for example, an 85-year-old grandmother wanted $5 million in damages after realizing that the gift she bought her 14-year-old grandson contained hidden porn. And several states, including California, Michigan, and Illinois, are fighting to ban the sale of M-rated games to minors.

The Hot Coffee scene confirmed all of the hysterical, overblown suspicions about Grand Theft Auto. And Rockstar’s publicity department, which in the past had displayed an uncanny knack for building brand mystique, only seemed to exacerbate the outrage. “Blaming it on hackers was a colossal PR screwup,” says Corey Wade, a former senior product manager at Rockstar.

Rockstar has since refused to comment on Hot Coffee, a move that has earned it the ire of many in the game industry. “If you want to be controversial, that’s great,” said Doug Lowenstein, outgoing president of the Entertainment Software Association, at an industry gathering in February. “But then don’t duck and cover when the shit hits the fan. Stand up and defend what you make.” Though he never mentioned Rockstar or Take-Two by name, the gaming press figured out his implied target.

At the same time, Take-Two was grappling with other problems. In January 2006, Barbara Kaczynski — a board member and former CFO of the National Football League who had been brought in to chair the audit committee after the SEC investigations began — resigned, citing the “increasingly unhealthy relationship between senior management and the board of directors ... characterized by a lack of cooperation and respect.” In October, Brant resigned from the company he founded. On December 11, Take-Two announced that it would be restating financial results from 1997 to April 30, 2006. And in February, Brant pled guilty to backdating stock options, paid an additional $7.3 million in penalties, and accepted a lifetime ban on serving in a management position of a public company.

Then, on March 29 of this year, an investor group including several prominent hedge funds voted to replace Take-Two’s CEO and most of its board at the company’s annual shareholder meeting. Rumors began to circulate that the company might be sold. (Tellingly, the stock jumped on initial reports of both of these developments.) Many noted that potential purchasers had to balance the upside of Rockstar’s immensely profitable GTA franchise against the downside of the many lingering SEC investigations, class actions, and grand jury subpoenas.

UNWANTEDIt’s August 25, 2006, seven weeks before the release of Rockstar’s latest game, Bully, and there’s a crowd outside the company’s doors. “This game is bananas! B-a-n-a-n-a-s!” they chant. They call themselves PeaceOholics, and they’re outraged about the new game, which they’ve never seen or played. One protest leader says the guys in Rockstar are “worse than terrorists.”

Bully turned out to be brilliant. It mashed up tropes from sources like The Outsiders, The Catcher in the Rye, and Sixteen Candles to create an archetypal high school setting. Just as GTA players must ingratiate themselves with the mob, the yakuza, and the triads to advance, players of Bully must win over the geeks, the jocks, and the preps. There’s no murder or sex. The game earned a T rating — OK to sell to anyone 13 and up.

Still, two months before Bully’s release, attorney Jack Thompson, a vocal opponent of violent videogames, filed a petition to prevent Wal-Mart and other major retailers from selling it on grounds that the game qualified as a public nuisance. His case was swatted down by Miami-Dade County circuit court judge Ronald Friedman. “There’s a lot of violence,” Friedman conceded, but “less than we see on television every night.”

Even though major retailers ultimately carried the game, sales of Bully fell flat. The year before, Rockstar’s adaptation of the 1979 film The Warriors met a similar fate. And now, even the reliable GTA cash cow is ailing. GTA: Vice City Stories, a spinoff for the Sony PSP handheld released in October and ported to PS2 in March, is the worst-selling game in the history of the franchise.

Furthermore, many key members of the team have left in the past two years, including cofounder Jamie King, Sam Houser’s right-hand man, who’d been with him since the BMG Interactive days. Terry Donovan, the marketing genius behind Rockstar’s larger-than-life image, is gone too. Without them, it will be harder than ever for the company to struggle back to the top of the charts.

Rockstar Games still has a chance to press the Reset button. On October 16, the company will release the hotly anticipated Grand Theft Auto IV, created for the latest generation of game consoles. If it’s as successful as San Andreas, it could help pay all the fines, penalties, and settlements of outstanding cases against Rockstar and Take-Two.

Sam Houser has always felt somewhat besieged. Back in 2002, he told me: “More people in this country would like to see us thrown out or locked up than doing what we do.” Perhaps that’s why, in Grand Theft Auto, there’s always an easy fix: No matter how many cops are on your tail, you can drive into any auto body shop, get a fresh coat of paint for your car, and your wanted level will drop to zero. It’s not that easy in real life.

*Contributing editor David Kushner *(david@davidkushner.com) wrote about the missing NASA tapes in issue 15.01.